Key Points
What are REITs? REIT is an acronym for Real Estate Investment Trust, which is a tax-advantageous trust structure investing in real estate assets. Similar to a unit trust, there is a REIT trustee to safeguard the REIT’s assets for investors, and the trustee usually appoints a REIT manager to manage the property assets. Like a unit trust, the REIT’s assets are divided into individual units which can be owned by a large number of investors, but unlike typical unit trusts, REITs are close-ended trusts - this means that there are a fixed number of units (units are not created or destroyed on a daily basis). Thus, investors who want to buy or sell REITs must do so on the secondary market (on the stock exchange). The REIT’s underlying real estate holdings earn an ongoing rental yield, and this income stream (after subtracting management and custody fees) is then passed on to investors in the REIT. For REITs to enjoy tax advantages on income distribution in Singapore, the trust must pay out at least 90% of taxable income to investors. An Excellent Proxy to Property Ownership… For Singapore investors, REITs are an excellent proxy to property ownership for a few reasons: 1) the minimum investment amount is significantly lower than that required for the purchase of a physical property, 2) the REIT structure is tax advantageous since distributions (from rental income) are free from tax (as long as the REIT distributes at least 90% of taxable income), 3) there is lower property-specific risk since REITs tend to hold a portfolio of real estate assets rather than a single building, and 4) REITs tend to be more liquid compared to physical property, since their units are traded daily on the stock exchange. …But investors should take note of some differences Unlike physical property investments which may employ larger amounts of leverage, Singapore REITs have leverage (debt-to-asset ratio) limits of 35% (or 60% if the REIT has obtained a credit rating), which may hinder the ability of a REIT to generate similarly-high returns compared to that of a physical property investment. Also, the majority of Singapore-listed REITs are invested in commercial, industrial and hospitality real estate assets but not local residential property, so investors will not be able to obtain exposure to the Singapore residential sector via REITs. Investors may also be subjected to manager-specific risk, should the manager make poor investment decisions (poor acquisitions or asset sales) which could erode the value of the REIT. Given that most REITs depend on shorter-term debt financing, investors may also be faced with cash-calls (raising equity via rights issues) should credit markets seize up and the REIT is unable to secure debt financing. In addition, there are ongoing management fees to be paid (REIT managers usually receive some fees related to acquisitions or sales of property as well), which adds to the cost of the investment. What’s my investment upside? Investors in REITs generate returns from two aspects – 1) capital appreciation and 2) rental income. Capital appreciation relates to increases in the market value of the REIT’s underlying property, which accrues positively to the REIT’s net asset value (NAV). The market value of REIT securities tend to track their NAVs, so gains in the prices of the REIT’s underlying property assets should translate to capital appreciation for investors. Also, given that Singapore REITs are mandated to pay out at least 90% of taxable income (to maintain their tax-advantageous status), investors receive ongoing distributions commensurate with the rental income of the REIT’s underlying real estate properties. Historically, Singapore REITs have achieved an average distribution payout of 6%, but as a result of market fluctuations, the distribution payout has ranged between 3% and 16.7% since 2003 (see Chart 1). As of 8 August 2012, based on the FTSE ST Real Estate Investment Trust index, Singapore-listed REITs currently sport a dividend yield of 5.53%. Chart 1: Singapore REIT dividend yields What’s my risk? Property prices can both rise and fall, so when the market value of a REIT’s underlying property declines, these losses will accrue to REIT investors. However, such capital losses may be exacerbated under difficult market conditions, since REITs are not mandated to trade at or near their NAVs. Investors in REITs are thus susceptible to equity market price volatility, highlighted by the recent 2007-2008 market decline. As measured by the FTSE ST Real Estate Investment Trust index, Singapore REITs posted a hefty -74.8% peak-to-trough decline from June 2007 to March 2009, highlighting the price-risk of investing in the REIT sector (see Chart 2). In addition, investors in REITs may be faced by capital calls when the trust is unable to refinance existing loans or when the manager wishes to use equity financing to pursue property acquisitions, which may require investors to inject even more money into their investment. Since rental income is available only when properties are tenanted, there is also a risk that the REIT’s income stream may be negatively affected should vacancy rates rise or rental rates decline. Chart 2: Price performance of Singapore REITs Consider a Unit Trust for Singapore REIT Exposure For investors seeking exposure to Singapore REITs, the Phillip Spore Real Estate Income Cl A SGD may be a compelling choice. The fund invests primarily in Singapore-listed REITs, offering investors diversified exposure across industrial, retail, commercial and hospitality REITs, with the additional benefit of professional fund management. Like a REIT, the fund also aims to pay a quarterly dividend commensurate with the yield received from the fund’s underlying holdings. See Also:
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| The Research Team is part of iFAST Financial Pte Ltd. |
| iFAST and/or its licensed financial adviser representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website. If you have any queries about the above contents, please contact iFAST. |
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